You can’t always trust 401(k) vendors to automatically get all the details right in their plan documents.

One of our readers shared a horror story from her company — one that at least had a happy ending — that underlines the need to be extra careful, especially in light of the recent Supreme Court ruling that makes plan sponsors vulnerable to employee lawsuits.

Mistakes caught after the fact

The company was in the process of changing 401(k) service providers when it discovered the outgoing provider had goofed on the plan documents in the existing plan.

The documents said the normal payout form would be a joint survivor annuity. So if anyone wanted another option – such as an IRA rollover or a cashout – he or she needed documentation with a notarized signature from a spouse or other beneficiary.

Even worse, there were administrative errors made on the election end. Records showed the old provider put through inappropriate elections from both current and ex-employees. A nightmarish paper chase ensued. Senior management had to calculate if the plan and its participants suffered financially from the inappropriate elections that went through. In addition, the company had to contact everyone who may have been affected by the errors and issue corrected documentation.

One saving grace in this whole mess was that the outgoing vendor (a well-known vendor with a good reputation) agreed to pick up the tab to correct the mistakes that’d been made. It took several months to clean up the mess, but everything was sorted out. Things could’ve turned out much, much worse.

Ever since then, the company has been muc wiser for the wear. Management is now hyper-vigilant about staying on top of its new 401(k) vendor. The firm has made sure the vendor got all the documentation right up front, and has made a habit of checking to make sure everything’s adminstered according to the plan documents.